Case BriefsForeign Courts

United States District Court, North District of California: While issuing a permanent injunction, stating Apple could no longer prohibit developers linking to their own purchasing mechanisms, Yvonne Gonzalez Rogers, J., held that Epic Games failed to show how Apple Inc. was operating an illegal monopoly.

Violation of Federal and Anti-Trust Laws

Plaintiff Epic Game Inc. sued Apple Inc. alleging violations of federal and state antitrust laws and California’s unfair competition laws based upon Apple’s operation of its App Store.

Epic Games claimed that Apple is an antitrust monopolist over:

  • Apple’s own system of distributing apps on Apple’s own devices in the App Store and
  • Apple’s own system of collecting payments and commissions of purchases made on Apple’s own devices in the App Store.

Antitrust jurisprudence also evaluates both market structure and behavior to determine whether an actor is using its place in the market to artificially restrain competition.

Apple argued that it does not enjoy monopoly power, and therefore does not violate federal and state law.

Trial did show that Apple was engaging in anti-competitive conduct under California’s competition laws. Further, the Court concluded that Apple’s anti-steering provisions hide critical information from consumers and illegally stifle consumer choice.

Since Apple has created an ecosystem with interlocking rules and regulations, it is difficult to evaluate any specific restriction in isolation or in a vacuum. Thus, looking at the combination of the challenged restrictions and Apple’s justifications, and lack thereof, the Court found that common threads run through Apple’s practices which unreasonably restrains competition and harm consumers, namely the lack of information and transparency about policies that effect consumers’ ability to find cheaper prices, increased customer service, and options regarding their purchases.

Apple employs these policies so that it can extract supracompetitive commissions from this highly lucrative gaming industry.

Background

In 2010, Epic Games agreed to and signed a Developer Product Licensing Agreement (“DPLA”) with Apple. Epic International subsequently signed a Developer Agreement and DPLA (for the account associated with Unreal Engine). At the time of the signing of these contracts, Mr. Sweeney understood and agreed to key contractual terms including, that Epic Games (i) was required to pay a commission on in-app purchases; (ii) was prohibited from putting a store within the App Store; (iii) was prohibited from sideloading apps on to iOS devices; and (iv) was required to use Apple’s commerce technology for any payments. Knowing the terms, Epic Games chose to enter into those contracts.

Analysis

Apples’ product Market Theory

Court considered whether the App Store provides two-sided transaction services or as Epic Games argued “distribution services”.

The Supreme Court has seemingly resolved the question: two-sided transaction platforms sell transactions. In two-sided markets, a seller “offers different products or services to two different groups who both depend on the platform to intermediate between them.”

Court found that the relevant App store product is transactions, not services, but that providing transactions may include facilitating services.

Apps or Digital Game Transactions?

Whether to narrow the scope of the transactions in terms of defining the product market.

Court concluded that the appropriate submarket to consider is digital game transactions as compared to general non-gaming apps.

Further, the Court stated that there were nine indicia indicating a submarket for gaming apps as opposed to non-gaming apps:

  • the App Store’s business model is fundamentally built upon lucrative gaming transactions;
  • gaming apps constitute a significant majority of the App Store’s revenues;
  • both the gaming, mobile, and software industry, as well as the general public, recognize a distinction between gaming apps and non-gaming apps;
  • gaming apps and their transactions exhibit peculiar characteristics and users;
  • game app developers often employ specialized technology inherent and unique to that industry in the development of their product;
  • game apps further have distinct producers—game developers—that generally specialize in the production of only gaming apps;
  • game apps are subject to distinct pricing structures as compared to other categories of apps;
  • games and gaming transactions are sold by specialized vendors; and
  • game apps are subject to unique and emerging competitive pressures, that differs in both kind and degree from the competition in the market for non-gaming apps.

Between digital game transactions and all app transactions, the relevant product is game transactions.

All Gaming Transactions or Mobile Gaming Transactions?

Court observed that the appropriate submarket to consider is the mobile gaming transactions market.

On a careful consideration of the evidence, Court found that Apples’ app distribution restrictions do have some anti-competitive effects. Unlike the increased merchant fees in Amex, Apple’s maintenance of its commission rate stems from market power, not competition in changing markets

Apple has shown procompetitive justifications based on security and the corollary interbrand competition, as well as generally with respect to intellectual property rights.

Epic Games has not met its burden to show that its proposed alternatives are “virtually as effective” as the current distribution model and can be implemented “without significantly increased cost.

California’s Unfair Competition Law

Epic Games challenges Apple’s conduct under the “unlawful” and “unfair” provisions of the UCL.

Court found that Epic Games has the standing to bring a UCL claim as a quasi-consumer, not merely as a competitor.

Since Epic could not show a violation of law, the claim under the “unlawful” standard failed.

Remedies

While Apple’s conduct did not fall within the confines of traditional antitrust law, the conduct fell within the purview of an incipient antitrust violation with particular anti-competitive practices which have not been justified.

Apple contractually enforces silence, in the form of anti-steering provisions, and gains a competitive advantage. Moreover, it hides information for consumer choice which is not easily remedied with money damages.

 Apple’s business justifications focus on other parts of the Apple ecosystem and will not be significantly impacted by the increase of information to and choice for consumers.

 A nationwide injunction shall issue enjoining Apple from prohibiting developers to include in their:

Apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to IAP.

Nor may Apple prohibit developers from:

Communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.

The Court concluded that Epic Games has not shown that the DPLA is unconscionable. A contractual term is not unconscionable unless it is found to be both procedurally and substantively unconscionable. Here, the absence of substantive unconscionability is dispositive. A contractual term is not substantively unconscionable unless it so “one-sided so as to ‘shock the conscience”

Epic Games pointed to no other evidence or authority based upon which the Court could find that the provisions at issue “shock the conscience.”

These are billion and trillion dollar companies with a business dispute.  

Breach of Contract

 Under California law, “the elements of a cause of action for breach of contract are (1) the existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to the plaintiff.” Oasis W. Realty, LLC v. Goldman, 51 Cal. 4th 811, 821 (2011)

Further, it was contended that, Epic Games’ actions violated the DPLA provisions

(1) requiring developers not to “hide, misrepresent or obscure any features, content, services or functionality” in their apps and not to “provide, unlock or enable additional features or functionality through distribution mechanisms other than the App Store,”; and

(2) requiring Epic Games to pay Apple “a commission equal to thirty percent (30%) of all prices payable by each end-user” through the App Store.

For the above argument, Court concluded that Epic games breached the provisions of DPLA and that Apple was entitled to relief for the violations.

Breach of the Implied Covenant of Good Faith and Fair Dealing

Since Court had concluded that Apple was entitled to relief on its breach of contract claim, the Court denied relief to Apple as to its alternative claim for the breach of the implied covenant of good faith and fair dealing.

Unjust Enrichment

 Apple asserts a counterclaim for unjust enrichment against plaintiff based on its alleged failure to pay Apple the agreed-upon 30% commission under the DPLA, but it asserts this counterclaim only “[i]n the alternative” to its claim for breach of contract.

The above stated alternative claim was denied.

Indemnification

Under California law, “[a]n indemnity agreement is to be interpreted according to the language and contents of the contract as well as the intention of the parties as indicated by the contract.” Myers Bldg. Indus., Ltd. v. Interface Tech., Inc., 13 Cal. App. 4th 949, 968 (1993)

Apple contended that it is entitled to indemnification from Epic Games under the indemnification provision because plaintiff’s lawsuit involved claims arising from or related to its breaches of its certifications, covenants, obligations, representations, or warranties under the DPLA, and its use of the Apple Software or services, its licensed application information, its covered products, and its development and distribution of the foregoing.

No such express language was included in the indemnification provision at issue.

In light of the absence of such express language, and in light of the terms used in the indemnification provision that suggested that it covers only third-party claims, the Court found and concluded that Apple has not shown that it is entitled to recover attorneys’ fees and costs from Epic Games pursuant to Section 10 of the DPLA.

Conclusion

Apple sought a declaratory judgment that:

  • DPLA is valid, lawful, and enforceable contracts
  • Apple’s termination of the DPLA with Epic Games was valid, lawful and enforceable
  • Apple has the contractual right to terminate the DPLA with any or all of the Epic games’ wholly owned subsidiaries, affiliates, and/or other entities under its control; and
  • Apple has the contractual right to terminate the DPLA with any or all of the Epic Affiliates for any reason or no reason upon 30 days written notice, or effective immediately for any “misleading fraudulent, improper, unlawful or dishonest act relating to” the DPLA.

Epic Games had contended that Apple was not entitled to the above-stated judgment and Apple’s termination of the DPLA as to Epic Games was “unlawful” retaliation.

Bench stated that the present matter does not involve retaliation.

Epic Games never showed why it had to breach its agreements to challenge the conduct litigated.

In Court’s opinion, plaintiff’s challenges to Apple’s claim for declaratory relief failed as to the remaining requests.

Relief to which Apple was entitled is that to which Epic Games stipulated in the event that the Court found it liable for breach of contract, namely:

  • damages in an amount equal to (i) 30% of the $12,167,719 in revenue Epic Games collected from users in the Fortnite app on iOS through Epic Direct Payment between August and October 2020, plus (ii) 30% of any such revenue Epic Games collected from November 1, 2020, through the date of judgment; and
  • a declaration that (i) Apple’s termination of the DPLA and the related agreements between Epic Games and Apple was valid, lawful, and enforceable, and (ii) Apple has the contractual right to terminate its DPLA with any or all of Epic Games’ wholly owned subsidiaries, affiliates, and/or other entities under Epic Games’ control at any time and at Apple’s sole discretion.

Final Words

As a major player in the wider video gaming industry, Epic Games brought this lawsuit to challenge Apple’s control over access to a considerable portion of this submarket for mobile gaming transactions. Ultimately, Epic Games overreached.

Court did not find Apple as an antitrust monopolist in the submarket for mobile gaming transactions. Though, the Court did find Apple’s conduct in enforcing anti-steering restrictions to be anti-competitive.

In view of the above discussion, Court gave the verdict in favour of Apple except with respect to violation of California’s Unfair Competition Law and only partially with respect to its claim for declaratory relief.

Apple Inc. and its officers, agents, servants, employees, and any person in active concert or participation with them were hereby permanently restrained and enjoined from prohibiting developers from

  • including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and
  • communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.

Injunction which was previously ordered was terminated.[Epic Games Inc. v. Apple Inc., Case No. 4:20-cv-05640-YGR, decided on 10-09-2021]

Case BriefsHigh Courts

Delhi High Court: Vibhu Bakhru, J., held that the scope of interference with an arbitral award under Section 34 of the Arbitration & Conciliation Act is limited.

Factual Matrix 

Steel Authority of India (SAIL) filed the instant petition under Section 34 of the Arbitration and Conciliation Act, 1996 impugning an Arbitral Award delivered by the Arbitral Tribunal.

Arbitration between the parties was an international commercial arbitration within the meaning of Section 2(1)(f) of the A&C Act and the same was conducted under the aegis of the Delhi International Arbitration Centre.

Respondent JOPL was the claimant and engaged in the business of maritime logistics including vessel operations and chartering.

Charter Party

Parties had executed a Charter Party whereby JOPL agreed to load, carry and discharge cargo of Bulk Coking Coal to ports in India.

Though there was no dispute between the parties as to the amount payable by SAIL under the Charter Party, there was also no dispute that JOPL had duly performed its obligations under the Charter Party.

Contract of Affreightment

However, it was stated that SAIL had withheld the admitted balance amount payable to JOPL for the reason that it had raised a claim of damages against JOPL in respect of another contract – Contract of Affreightment for shipping cargos of limestones.

What was the dispute?

OPL had not provided a vessel under the Contract of Affreightment for the 20th shipment and SAIL was compelled to make alternate arrangements for the same. SAIL claimed that JOPL had breached its obligations under the Contract of Affreightment and raised the claim for damages quantified at the additional expenses incurred by it to arrange for shipment of balance quantity of limestone.

But JOPL disputed the claim and stated that it was not obliged to provide a vessel as the shipment period under the Contract of Affreightment had come to an end.

Hence, disputes between the parties arising as a result of SAIL withholding the admitted amounts due under the Charter Party, were referred to arbitration.

Finding of the Arbitral Tribunal

The Arbitral Tribunal held in favour of JOPL and against SAIL and found that the Charter Party was unconnected with the Contract of Affreightment.

The Arbitral Tribunal found that there was no nexus between the two contracts. Whereas the Charter Party was a standalone contract for one shipment of Coking Coal, the Contract of Affreightment was a contract for multiple shipments of limestones over a period of twelve months.

In view of the above, the Arbitral Tribunal held that SAIL was not entitled to withhold any amount from the amounts as admittedly owed by it to JOPL under the Charter Party. It, accordingly, awarded a sum of USD 515,739.88.

Reasons and Conclusion

SAIL’s entitlement to any equitable set-off was contrary to public policy since Arbitral Tribunal failed to appreciate the same.

Fundamental premise that JOPL had breached the Contract of Affreightment was disputed

Bench added that SAIL had claimed that JOPL had breached the Contract of Affreightment and therefore, it was entitled to seek the performance of the balance obligations at its risk and cost. For the said claim SAIL was required to prove both its entitlement to damages and its measure.

 Whether set off could be claimed is a matter of discretion of the Court adjudicating the claim. SAIL could not claim it as a matter of right and in the given set of facts and circumstances, SAIL was not entitled to claim any set off as there was no ascertained debt owing by JOPL to SAIL.

Court while holding the position that impugned award is an award arising out of an international commercial arbitration and therefore, it cannot be assailed on the ground of patent illegality as contained in Section 34(2A) of the A&C Act.

Supreme Court in the decision of Ssagyong Engineering & Construction Ltd. v. National Highways Authority of India, (2019) 15 SCC 131, wherein it was held that an award arising from an international commercial arbitration can be assailed only on the limited grounds as specified under Section 34(2) of the A&C Act.

Hence, no grounds, whatsoever, to assert that the decision of the Arbitral Tribunal to reject SAIL’s contention falls foul of the fundamental policy of Indian Law.

The onus to prove that SAIL was entitled to withhold the admitted sums against any other claim, rested on SAIL. And it failed to discharge the said burden.

Whether the impugned award was liable to be set aside to the extent that it awards 12% interest compounded with quarterly rests, on the amount due to JOPL?

Court noted that the Statement of Claims filed by JOPL set outs the grounds for claiming the amount of USD 515,739.88.

It was also observed that JOPL had unequivocally stated that the only dispute between the parties was with regard to the payment of balance freight. SAIL did not traverse the said assertion. It was apparent that JOPL had premised its claim for interest and costs on the ground that SAIL had unjustifiably withheld the amounts admittedly payable by it. Thus, compelling JOPL to refer the disputes to arbitration. SAIL had contested the said Statement of Claims only on the ground that it was entitled to recover a sum of USD 1,187,847.318/- which, according to SAIL, was payable as damages by JOPL in respect of the Contract of Affreightment.

High Court opined that the SAIL cannot be permitted to contest the impugned award as contrary to fundamental policy of Indian Law.

Bench found considerable merit in the contention advanced by Mr Shankar that the rate of 12% p.a. interest compounded with 3 monthly rests cannot be held contrary to fundamental policy of Indian Law.

Supreme Court in its decisions noted that the recovery of compound interest would not contravene any fundamental policy of Indian Law, Mr Shankar also pointed that there are a number of legislation that provide for payment of compound interest.

It is also a norm of the banking industry to charge compound interest with either monthly or quarterly rests. Therefore, an arbitral award cannot be held to be contrary to the fundamental policy of Indian law only because one of the parties is awarded compound interest.

In view of the offering that, if SAIL was willing to pay the awarded amount with a lesser interest and put quietus to disputes, JOPL would accept the same and waive its right for receiving the balance interest.

Therefore, Bench adjourned the hearing to enable SAIL’s counsel to take instructions in the above regard. But the said offer was accepted by the Court.

But, considering that public funds are involved, this Court considered it apposite to grant SAIL another opportunity to reflect on the offer made on behalf of JOPL.

High Court held that the present petition was speculative and has been filed by SAIL to only protract litigation. Rs 50,000 costs were imposed.[SAIL v. Jaldhi Overseas PTE Ltd., 2021 SCC OnLine Del 2642, decided on 28-05-2021]


Advocates before the Court:

For the Petitioner: Mr Joy Basu, Senior Advocate with Mr Ashish Rana, Mr Kanak Bose, Advocates.

For the Respondent: Mr Ashwin Shankar and Mr Rishi Murarka, Ms Shweta Sadanandan, Mr Aditya Raj, Mr George Rebello,

Advocate.

Case BriefsSupreme Court

Supreme Court: The bench of L. Nageswara Rao* and Vineet Saran, JJ has shed light on how Courts should proceed while interpreting contracts.

Referring to various authorities, here is what the Court concluded:

  • The duty of the Court is not to delve deep into the intricacies of human mind to explore the undisclosed intention, but only to take the meaning of words used i.e. to say expressed intentions.[1]
  • In seeking to construe a clause in a Contract, there is no scope for adopting either a liberal or a narrow approach, whatever that may mean. The exercise which has to be undertaken is to determine what the words used mean. It can happen that in doing so one is driven to the conclusion that clause is ambiguous, and that it has two possible meanings. In those circumstances, the Court has to prefer one above the other in accordance with the settled principles. If one meaning is more in accord with what the Court considers to the underlined purpose and intent of the contract, or part of it, than the other, then the court will choose former or rather than the later[2].
  • The intention of the parties must be understood from the language they have used, considered in the light of the surrounding circumstances and object of the contract.[3]
  • Every contract is to be considered with reference to its object and the whole of its terms and accordingly the whole context must be considered in endeavoring to collect the intention of the parties, even though the immediate object of inquiry is the meaning of an isolated clause[4].

[Bangalore Electricity Supply Company Limited (BESCOM) v. E.S. Solar Power Pvt. Ltd, 2021 SCC OnLine SC 358, decided on 03.05.2021]


Judgment by: Justice L. Nageswara Rao

[1] Kamala Devi v. Seth Takhatmal, 1964 (2) SCR 152

[2] Ashville Investment v. Elmer Contractors, 1988 (2) All ER 577

[3] Bank of India and Anr. v. K. MohanDas, (2009) 5 SCC 313

[4] Bihar State Electricity Board v. Green Rubber Industries, (1990) 1 SCC 731

Case BriefsForeign Courts

Supreme Court of Pennsylvania: While deliberating upon the question that whether no-hire, or “no poach,” provisions that are ancillary to a services contract between business entities are enforceable under the laws of Pennsylvania, the Bench of Baer, CJ., and Saylor, Todd, Donohue, Dougherty, Wecht and Mundy, JJ., unanimously held that no-hire provision creates a likelihood of harm to the public, i.e., non-parties to the contract. “The no-hire provision impairs the employment opportunities and job mobility of PLS employees, who are not parties to the contract, without their knowledge or consent and without providing consideration in exchange for this impairment”. Such provisions undermine free competition in the labor market in the shipping and logistics industry, which creates a likelihood of harm to the general public, thus in the instant case the “no- hire” provision is unenforceable.

Facts:

Pittsburgh Logistics Systems, Inc. (hereinafter “PLS”) is a third-party logistics provider that arranges for the shipping of its customers’ freight with selected trucking companies. Beemac Trucking (hereinafter “Beemac”) is a shipping company that conducts non-exclusive business with PLS. In August 2010, PLS and Beemac entered into a one-year Motor Carriage Services Contract, which automatically renewed on a year to year basis until either party terminated it. It contained both a non-solicitation provision and the no-hire provision. While the contract was in force, Beemac hired four PLS employees.

On 29th November, 2016, PLS filed an action in the Court of Common Pleas of Beaver County against Beemac alleging breach of contract, tortious interference with contract, violation of the Pennsylvania Uniform Trade Secrets Act, and civil conspiracy. PLS also sued its 4 former employees for breach of contract, alleging they had breached the non-competition and non-solicitation provisions of their employment contracts. Following a three-day preliminary injunction hearing, the Trial Court refused to enforce the no-hire provision, finding the provision violated public policy. Subsequently the PLS appealed, but the Superior Court affirmed the Trial Court’s decision.

Contentions:

PLS contended before the Court that by voiding the no-hire provision, the Superior Court disregarded Pennsylvania public policy which advised it to enforce the terms of the agreement that these parties who were on a level playing field negotiated in good faith and entered at arm’s length. PLS further stated that the cases relied upon by the Superior Court in support of its conclusions are distinguishable, and that “cases enforcing no-hire provisions are not only based on sound jurisprudential grounds, but are properly appreciative of the economic context and business realities that lead intermediary companies, like PLS, to find them necessary to further their business interests”.

Per contra, Beemac stated that that the Superior Court correctly applied Pennsylvania law regarding restraints of trade in holding that the no-hire provision violates public policy. It was argued that PLS failed to explain why a company, already in a superior bargaining position when hiring and negotiating with employees, should be free to contract away the rights of its employees by way of contracts to which they are not parties and for which they receive no consideration. Beemac drew the attention of the Court upon the fact that recently the Department of Justice (DOJ) has taken a strong stand against no-hire restrictions. Beemac further argued that governmental rejection of no-hire restraints “is firmly rooted in long-established ethical and moral standards

Observations:

Noting that there is a dearth of Pennsylvania case laws with regards to ‘no-hire’ provisions, therefore in order to resolve the dispute the Court deemed it fit to review the judgments of other jurisdictions upon which the parties have relied on.

Upon extensive perusal of the case laws cited by the parties, the Court observed that, “To determine the enforceability of a provision in restraint of trade that is ancillary, or supplementary, to the principal purpose of a contract, we employ a balancing test to determine the reasonableness of the restraint in light of the parties’ interests that the restraint aims to protect and the harm to other contractual parties and the public”. Applying the said balancing test, the Court noted that in the instant case the no-hire hire provision was ancillary to the principal purpose of the shipping contract between PLS and Beemac. The no-hire provision is a restraint on trade because the two commercial entities agreed to limit competition in the labor market by promising to restrict the employment mobility of PLS employees. The Court further observed that PLS had a legitimate interest in preventing its business partners from poaching its employees, who had developed specialized knowledge and expertise in the logistics industry during their training at PLS; however, the no-hire provision is both greater than needed to protect PLS’s interest and creates a probability of harm to the public. It is overbroad because it precludes Beemac, and any of its agents or independent contractors, from hiring, soliciting, or inducing any PLS employee or affiliate for the one-year term of the contract plus two years after the contract ends. The no-hire provision precluded Beemac from hiring or soliciting all PLS employees, regardless of whether the PLS employees had worked with Beemac during the term of the contract.

Agreeing with the observations of the Superior Court, the Bench concluded that PLS enforced the no-hire provision by seeking to enjoin Beemac from employing the former PLS employees who had already left PLS and obtained employment with Beemac. If PLS was successful, the effect of its enforcement of the no-hire provision would have deprived its former employees of their current jobs and livelihoods; “Balancing PLS’s interest against the overbreadth of the no-hire provision and the likelihood of harm to the public, we conclude that the no-hire provision is unreasonably in restraint of trade and therefore unenforceable”.

[Pittsburgh Logistics Systems, Inc. v. Beemac Trucking LLC., No. 31 WAP 2019, decided on 29.04.2021]  


Sucheta Sarkar, Editorial Assistant has put this report together 

Op EdsOP. ED.

1. That the era of modernisation has brought about a radical change in the manner of functioning of not only private undertakings but also the Government. The functions of modern Government extend much beyond the sovereign functions such as legislating, and now the Government is a key functionary in the commercial arena as well, primarily by delegating infrastructure development to private entities by floating tenders.

2. The Government has now started delegating the task of infrastructure development to private entities which work directly under the supervision of the Government Departments concerned or any instrumentality of State, which now forms an essential part of the trade and commerce activities carried out by the Government. The power of the Government to enter into contracts has been recognised under Article 299 of the Constitution, which states as under:

299. Contracts.– (1) All contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by the President, or by the Governor of the State, as the case may be, and all such contracts and assurances of property made in the exercise of that power shall be executed on behalf of the President or the Governor by such persons and in such manner as he may direct or authorise.

(2) Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the purposes of this Constitution, or for the purposes of any enactment relating to the Government of India heretofore in force, nor shall any person making or executing any such contract or assurance on behalf of any of them be personally liable in respect thereof.”

3. The above raises an important question as to whether the Government should be subjected to the same rigours as other individuals or does it have any special rights over and above the rights available with ordinary contracting parties under the Contract Act, 1872?

4. The State authorities which are then tasked with the responsibility of infrastructure development should be deemed to act reasonably even though they are acting in a private law capacity. The doctrine of arbitrariness should not only extend to testing the effect and enforcement of legislations but also to provisions of contracts, particularly, contracts whose enforcement is widespread.

5. It would also be relevant to point out here that most contracts entered into by government agencies are standard form contracts (typically referred to as General Conditions of Contract) which are completely non-negotiable, and contractors are required to sign the dotted line. Any subject-matter which is not covered under the provisions of the General Conditions of Contract, are then agreed upon in the form of an addendum typically referred to as the Additional Conditions of Contract or Special Conditions of Contract.

6. In this backdrop, the Supreme Court has set aside the arbitrary and one-sided provisions in several contracts, particularly Builder-Buyer Agreements. However, the contracts which are entered into by governmental agencies perhaps stand at a higher pedestal than those of private builders inasmuch as governmental contracts do not withstand the same level of scrutiny from our judiciary. Thus, for the purposes of this article, I would restrict the discussion to the following clauses which are commonly used in government infrastructure contracts:

  1. Escalation clauses
  2. Variation clauses vis-à-vis claims for loss of profit
  3. Extension of time and recovery clauses
  4. Dispute resolution clauses

Escalation Clause

7. In contracts involving large quantum of work, price escalation clauses are introduced to prevent increase of price during the fixed course of execution of the work entrusted to the contractor, on the ground that the price of the material or equipment being utilised has increased. In ordinary course, the duration of the contract increases much beyond the initial estimated duration (referred to as the ‘stipulated period of completion’) and often by several years. In these circumstances, where a tendered work is a fixed-price and fixed-time contract, the contractors cannot be bound to execute the work at the initial cost over a period which has increased multi-fold. The Supreme Court in Tarapore & Co. v. State of M. P.[1] has observed that “escalation is a normal incidence arising out of gap of time in this inflationary age”. The Court  further went on to hold that escalated rates could be awarded in arbitration even in the absence of any provision for escalation in the contract.

8. Further, the intent behind incorporating escalation clauses in infrastructure contracts is succinctly explained by the Delhi High Court in Deconar Services Pvt. Ltd. v. NTPC Ltd.[2], as under:

9. …   A fixed price contract would be a fixed price contract only during the original period and surely it is an absurdity to suggest that irrespective of the extension of the contract well beyond the original stipulated date of completion and more so when the same is on account of breaches/ delays by the objector, yet in such a case it can be contended that still no escalation would be paid…

9. The difficulty which arises in pressing these claims is that all the pronouncements give liberty to the arbitrator to determine a reasonable measure of compensation while deciding the claims, so even if the escalated amount of the claims are calculated as per the formula provided in the agreement between the parties, the Tribunal is free to reject the calculation and decide any amount which it considers to be reasonable. This again is an exception to the series of judgments which state that “The arbitrator, being the prisoner of the contract, is bound to remain within the four corners of the contract[3]. On the other hand, if there is no escalation clause (and therefore, no formula for calculation), the Arbitral Tribunal is free to determine the amount to be paid towards escalation by any means which are ‘reasonable’. This results in a precarious position where the Arbitral Tribunal has the discretion to apply any method that it deems fit coupled with the varying levels of discretion that are appended to the term ‘reasonable’.

Variation clauses vis-à-vis claims for loss of profit

10. Variation clauses are inserted into the agreement for a prudent reason and fixing the price of the contract up to a reasonable limit. When the project which involves the use of large quantities of material and equipment, there might arise a situation that the quantity of some material differs from what had been mentioned in the Bill of Quantities/Schedule of Quantities. Thus, it is prudent to introduce and keep a variation clause in the agreement to deal with the exigent situation of difference in quantities which are actually utilised for execution of the project as compared to what was estimated in the Bill of Quantities. For ease of reference, Clause 12 of the General Conditions of Contract[4], published by the Central Public Works Department is being reproduced hereunder:

The Engineer-in-Charge shall have the power (i) to make alteration in, omissions from, additions to, or substitutions for the original specifications, drawings, designs and instructions that may appear to him to be necessary or advisable during the progress of the work, and (ii) to omit a part of the works in case of non-availability of a portion of the site or for any other reasons and the contractor shall be bound to carry out the works in accordance with any instructions given to him in writing signed by the Engineer-in-Charge and such alterations, omissions, additions or substitutions shall form part of the contract as if originally provided therein and any altered, additional or substituted work which the contractor may be directed to do in the manner specified above as part of the works, shall be carried out by the contractor on the same conditions in all respects including price on which he agreed to do the main work except as hereafter provided.

(emphasis supplied)

11. Per contra, in the event that the work is substantially curtailed from what had been originally awarded, the contractors are at liberty to raise a claim under the head ‘loss of profit’. This head of claim finds its inception in the judgment of the Supreme Court in T. Brij Paul Singh v. State of Gujarat[5] which has been reiterated several times and the judgment in Dwaraka Das v. State of M. P.[6] concisely elucidates the subject claim as under:

9…. This Court in A. T. Brij Paul Singh v. State of Gujarat[7] while interpreting the provisions of Section 73 of the Contract  Act, 1872 has held that damages can be claimed by a contractor where the Government is proved to have committed breach by improperly rescinding the contract and for estimating the amount of damages, the Court should make a broad evaluation instead of going into minute details. It was specifically held that where in the works contract, the party entrusting the work committed breach of contract, the contractor is entitled to claim the damages for loss of profit which he expected to earn by undertaking the works contract. Claim of expected profits is legally admissible on proof of the breach of contract by the erring party.

12. The question which frequently arises for consideration before the arbitrators is balancing the rights of the parties where one pleads loss of profit on account of curtailment of the scope of works after awarding the tender and the other takes a defence stating that the contract allows them to modify and amend the scope of work up to a certain extent while relying on the variation/deviation clause. The intent behind the variation/deviation provisions is to meet the exigencies which arise on account of some peculiar situations at the project work site and definitely not to cover up the mismanagement or lack of planning/decision-making on the part of the governmental agencies.

13. These clauses are being misused as a defence to contest claims for loss of profit and conceal the mismanagement on the part of the government agency, which is not considered by Arbitral Tribunals. The Arbitral Tribunals ought to consider the intent behind the provisions rather than mechanically applying them in the manner as is being contended by the government agency.

Extension of time and recovery clauses

14. The third area of friction which really comes up in infrastructural arbitrations is the fact of extension of time, which later becomes the basis for imposing a penalty on the contractors as well as making deductions from the sums due to the contractors as being liquidated damages.

15. The importance of the extension of time provisions in infrastructure contracts is based on the termination of contract (particularly, by efflux of time). Since, infrastructure projects contain a stipulated period for completion of the works, failing which penalty is imposed on the contractor by the State instrumentality. However, there are certain exceptions to extending the time without imposition of any penalty which stem from there being circumstances beyond the control of the parties due to which the project work could not be executed e.g. the nationwide lockdown. The same applies vice versa as well i.e. in the event, time for completion of the works is extended without imposition of any penalty, it is presumed that there was no breach of contract or non-performance on the part of the contractor. The High Court of Delhi in N. Kharbanda & Son v. Delhi Development Authority[8] has observed as under:

9….However, it is not in dispute that the time period of the contract was extended by the respondent without any penalties on the petitioner and such an occasion would only arise if the fault was not attributable to the petitioner…

16. However, one contentious issue which often arise for consideration is what is the consequence of non-extension of the time period for completion of the project? Ordinarily, the contract would be deemed to have been terminated by efflux of time, but if the parties continue to perform their obligations without any extension, the same should tantamount to it becoming a concluded contract in terms of Section 8 of the Contract Act, 1872.

17. What is even more intriguing in these matters is that the governmental agency in these contracts has conferred upon itself the power to impose penalty upon the contractor. Most government contracts confer upon a senior officer of its agency the power to determine whether the contractor is guilty of breach of contract and the power to impose penalty after determination of guilt. Even though, this issue has come before the Courts several times over, the Courts have not considered the factum that ultimately the official making the so-called analysis of guilt or innocence is an employee on the rolls of that very agency which would later become a party to that lis. In my opinion, the same falls foul of fundamental principles of natural justice, particularly, nemo judex in sua causa (no person shall be a Judge in his/her own cause). The Courts intervene to a limited extent by checking whether the contractor was given an opportunity to present its case before the appointed official.

18. Further, the same bears similarity to the provision contained in Article 371-D(5) of the Constitution, which was struck down by a Constitution Bench of the Supreme Court in Sambamurthy v. State of Andhra Pradesh [9] as being violative of the rule of law which is a part of the basic structure of the Constitution. It can be said that the powers conferred upon the official of the government agency to impose penalty should also be ultra vires as the agency itself, as a party to the lis, is then deciding the extent of breach by the other side and is empowered to effect a recovery without any adjudication whatsoever. Ordinarily, the agency ought to initiate a claim/counter-claim before the Arbitral Tribunal or the Court to decide the breach of contract and damages, rather than equipping its own self to pass a decision in a matter where it has economic interest. The said position of law was reiterated by the Supreme Court in Gangotri Enterprises Ltd. v. Union of India[10] where it was held that until the demand of the Government was crystallised or adjudicated upon, the Government cannot withhold the money of the contractor. However, in a recent decision in State of Gujarat   v. Amber Builders[11], the decision in Gangotri Enterprises has been declared per incuriam, but it has been reiterated that any recovery effected by the Government is subject to further adjudication by the Arbitral Tribunal, which would independently decide the merits of imposition of the financial penalty.

19. In ordinary commercial transactions, it has become trite law that one-sided or arbitrary provisions in agreements are struck down if they favour one-party or constitute an unfair trade practice, but it seems that perhaps because the Government is deemed to act in a reasonable and rational manner, that contracts entered into by governmental agencies do not bear similar scrutiny.

Dispute resolution clauses

20. Most contracts now contain a dispute resolution clause, whereby the parties are bound to refer any disputes arising out of the agreements, to arbitration. The primary reason for introduction of such clauses was the delay which comes about in the regular adjudicatory process before the Courts in India.

21. Government contracts in particular, contain a dispute resolution clause, which is not only limited to arbitration, but prescribes several pre-requisite measures to be adopted before a request for appointment of an arbitrator can be made before the appointing authority i.e. persona designata, who again is an official of the governmental agency itself. Most Government contracts provide for a proceeding before some senior officials akin to mediation of the disputes, and more often than not, such mediation fails simply because the presiding officer is an official of the government agency itself.

22. The Courts also refuse to entertain petitions for appointment of arbitrators in the event the party approaches the Court, primarily on the ground that the ‘mandatory pre-requisite’ conditions imposed by the Dispute Resolution Clause have not been complied with. This leaves aside all scope for claiming urgent relief against governmental agencies in infrastructure contracts[12].

23. The Supreme Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd.[13] has held that a person who has an interest in the outcome or decision of the disputes must not have the power to appoint a sole arbitrator. In my opinion, the persona designata, who is mostly a senior employee of the same government agency would have an interest, albeit indirect, in the outcome of the dispute. To my utter dismay, even the latest edition of the General Conditions of Contract as formulated by the Central Public Works Department does not reflect this changed position of law and continues to have its own official as the persona designata.

24. The second problem which arises while complying with the myriad pre-requisites in these long-drawn arbitration clauses is the concept of delay in appointment of arbitrators. In certain situations, the persona designata has delayed the appointment of arbitrators so that the formalities for imposition of penalty can be completed by the agency and the Tribunal does not stay the imposition of the penalty under Section 17 of the Arbitration and Conciliation Act, 1996[14]. In certain situations, the persona designata, calls for the list of claims proposed to be raised by the contractor, and chooses to refer only a few of them rather than all claims, by virtue of which he has effectively usurped the powers of the Arbitral Tribunal and decided the claim on his own.[15]

Conclusion

25. What constitutes a major hitch for the parties presently, is the narrow scope of intervention by Courts in the arbitral process as well as in the awards. Particularly, the recent judgment of the Supreme Court in SsangYong Engineering & Construction Company Ltd. v. National Highways Authority of India[16] which has crystallised and narrowed down the scope of interference under Section 34 in light of the amendments made to the Act in 2015.

26. In view of all of the foregoing, though it can be said that the Courts have exercised their judicial powers to balance the equities between the parties, much is left to be desired in the judicial scrutiny of governmental contracts. Even though, the Government is obligated to act in a fair, non-arbitrary and reasonable manner even while acting in a private law capacity, the same remains to be mere sermons and directives in the law reports. Government contracts should not be protected from judicial scrutiny, particularly, when the Constituent Assembly chose to not grant any special protection or status to the contracts entered into by the Government under the Constitution. Moreover, now that the Supreme Court has propounded the doctrine of arbitrariness to test the validity of legislations[17], it is the appropriate time to apply the same to private law and test the validity of contractual provisions.

27. Therefore, it is optimal time that the judicial scrutiny of governmental contracts is done at par with private commercial contracts and the conduct of the Government is analysed objectively to determine the breach of contract and consequential damages.


*Advocate

[1] (1994) 3 SCC 521

[2] 2009 SCC OnLine Del 4108

[3] Republic Construction Co. v. Delhi Development Authority, 2009 SCC OnLine Del 1902

[4]Available at https://cpwd.gov.in/Publication/GCC_Constructions_works_2020.pdf, last accessed on 15.06.2020

[5] (1984) 4 SCC 59

[6] (1999) 3 SCC 500

[7] (1984) 4 SCC 59

[8] 2006 SCC OnLine Del 1871

[9] (1987) 1 SCC 362

[10] (2016) 11 SCC 720

[11] (2020) 2 SCC 540

[12] Although in exceptional situations, the Courts have intervened, in writ petitions where patent illegality can be seen on the face of the record

[13] 2019 SCC Online SC 1517

[14] The  Supreme Court in the celebrated judgment of J. G. Engineers v. Union of India(2011) 5 SCC 758, has clearly stated that decision of the Superintending Engineer imposing penalty on the contractors is not adjudication

[15] Earnest Builders (P) Ltd. v. Union of India, 2007 SCC OnLine Del 678; Rajeev Traders v.  South Central Railway, 2002 SCC OnLine AP 628

[16] (2019) 15 SCC 131

[17] Shayara Bano v. Union of India, (2017) 9 SCC 1

Op EdsOP. ED.

The law relating to specific performance as engrafted in the Specific Relief Act, 1963 (“the Act”) is an extremely important facet of civil law. The Act inter alia covers most aspects pertaining to performance of contracts as also injunctive reliefs which can be granted and claimed.

This article shall acquaint and take you through the basic principles and important aspects to be borne in mind while seeking specific performance of contracts in relation to immoveable property and related aspects.

In respect of moveable property, the general rule is that specific relief is refused as there is a presumption that the failure to perform can be compensated in terms of money in view of Section 10 of the Act as unamended. Even though Section 10 of the Act now stands amended, it does not mean that specific performance for moveables will be ordinarily granted. The law will still provide and presume that breach of a contract in respect of moveables can be compensated and therefore refuse performance. The exception to this will be amongst others when the moveable property is not an ordinary article of commerce, or is of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market.

Nature of Specific Performance 

Specific performance is an equitable relief granted by the Court to enforce contractual obligations between the parties. It is a remedy in performance as opposed to a claim sounding in damages for breach of contract where pecuniary compensation is granted as relief for failure to carry out the terms of the contract.

What are the factors a Court considers when decoding to grant or refuse specific performance 

Section 10 of the Act as now amended[4] emphasises that specific performance is usually to be granted and denied only in circumstances as set out in Sections 11, 14 and 16 of the Act[5].

Section 10 of the Act as amended by the Specific Relief (Amendment) Act, 2018 seeks to make a departure and is an attempt to reduce the discretion of the Courts relating to enforcement of specific performance of contracts in keeping with the Statement of Objects and Reasons for the amending Act of 2018[6].

Similarly, Section 20 of the Act as it stood earlier provided that the grant of relief was discretionary. It provided as under:

“20. Discretion as to decreeing specific performance.—(1) The jurisdiction to decree specific performance is discretionary, and the court is not bound to grant such relief merely because it is lawful to do so; but the discretion of the court is not arbitrary but sound and reasonable, guided by judicial principles and capable of correction by a court of appeal….”

However with the amendment to Section 20 by the Amendment Act in 2018, it now also seeks to take away the discretion to an extent[7].

Despite the amendments as above, the Courts still consider the following well-settled criteria and principles while granting or denying specific performance.

1. Readiness and Willingness.

Section 16(c)[8] of the Act makes it mandatory for the plaintiff to prove that he has already performed or was always ready and willing to perform the essential terms of the contract which were to be performed by him.

Section 16(c) of the Act as amended by the Specific Relief (Amendment) Act, 2018 no longer requires the plaintiff to plead readiness and willingness as it was earlier mandated by a mantra in the plaint. However, in my view it is still mandatory for the plaintiff to prove that he has already performed or was always ready and willing to perform the essential terms of the contract which were to be performed by him. This cannot be done unless the plaintiff seeking performance also makes necessary averments in the plaint showing and disclosing facts which disclose the readiness and willingness and or performance. It is settled law that evidence cannot be contrary to pleadings and therefore it would still be necessary to have sufficient pleadings which would enable the Court to infer the ingredients of the amended Section 16 i.e. proof of readiness and willingness or performance.

The obligation cast by Section 16(c) of the Act upon the plaintiff to prove that he has already performed or was always ready and willing to perform essential terms of the contract which were to be performed by him have been emphasised by the Supreme Court in the following judgments:

Mehboob-ur-Rehman v. Ahsanul Ghani[9]

“14. Though, with the amendment of the Specific Relief Act, 1963 by Act  18 of 2018, the expression “who fails to aver and prove” is substituted by the expression “who fails to prove” and the expression “must aver” stands substituted by the expression “must prove” but then, the position on all the material aspects remains the same that, specific performance of a contract cannot be enforced in favor to the person who fails to prove that he has already performed or has always been ready and willing to perform the essential terms of the contract which are to be performed by him, other than the terms of which, the performance has been prevented or waived by the other party.”

        (emphasis supplied)

Umabai v. Nilkanth Dhondiba Chavan[10]

“30. It is now well settled that the conduct of the parties, with a view to arrive at a finding as to whether the plaintiff-respondents were all along and still are ready and willing to perform their part of contract as is mandatorily required under Section 16(c) of the Specific Relief Act must be determined having regard to the entire attending circumstances. A bare averment in the plaint or a statement made in the examination-in-chief would not suffice. The conduct of the plaintiff-respondents must be judged having regard to the entirety of the pleadings as also the evidences brought on records.     

(emphasis supplied)

2. Conduct Unblemished.

It is necessary that a plaintiff’s conduct in performance of the contract or attempting to fulfil the same shows an unwavering intention of wanting to perform. The Supreme Court has in para 12 of its judgment in  Aniglase Yohannan v. Ramlatha[11] held that:

“12. The basic principle behind Section 16(c) read with Explanation (ii) is that any person seeking benefit of the specific performance of contract must manifest that his conduct has been blemishless throughout entitling him to the specific relief. The provision imposes a personal bar. The Court is to grant relief on the basis of the conduct of the person seeking relief. If the pleadings manifest that the conduct of the plaintiff entitles him to get the relief on perusal of the plaint he should not be denied the relief.”

                    (emphasis supplied)

3. Readiness must be shown throughout up to the date of the decree.

A plaintiff in order to succeed must prove facts which would show his readiness and willingness at all times. It is not enough to show the readiness uptil the time of the plaint but the conduct must be such as discloses readiness and willingness at all times from the time of the contract till the suit and up to the decree. This principle was laid down in the following judgements:

Gomathinayagam Pillai v. Palaniswami Nadar[12]

“6. But the respondent has claimed a decree for specific performance and it is for him to establish that he was, since the date of the contract, continuously ready and willing to perform his part of the contract. If he fails to do so, his claim for specific performance must fail. As observed by the Judicial Committee of the Privy Council in Ardeshir Mama v. Flora Sassoon[13]:

“In a suit for specific performance, on the other hand, he treated and was required by the Court to treat the contract as still subsisting. He had in that suit to allege, and if the fact was traversed, he was required to prove a continuous readiness and willingness, from the date of the contract to the time of the hearing, to perform the contract on his part. Failure to make good that averment brought with it the inevitable dismissal of his suit.”

The respondent must in a suit for specific performance of an agreement plead and prove that he was ready and willing to perform his part of the contract continuously between the date of the contract and the date of hearing of the suit.”           

(emphasis supplied)

Vijay Kumar v. Om Parkash[14]

7. In order to obtain a decree for specific performance, the plaintiff has to prove his readiness and willingness to perform his part of the contract and the readiness and willingness has to be shown through out and has to be established by the plaintiff.

      (emphasis supplied)

J.P.Builders v. A. Ramadas Rao[15]

“27. It is settled law that even in the absence of specific plea by the opposite party, it is the mandate of the statute that the plaintiff has to comply with Section 16(c) of the Specific Relief Act and when there is non-compliance with this statutory mandate, the court is not bound to grant specific performance and is left with no other alternative but to dismiss the suit. It is also clear that readiness to perform must be established throughout the relevant points of time. “Readiness and willingness” to perform the part of the contract has to be determined/ascertained from the conduct of the parties.”

                    (emphasis supplied)

4. It is not necessary that the plaintiff must tender the money due under a contract.

Although one of the factors showing the readiness and willingness may be the ability of a plaintiff to make payment that cannot be a factor by itself to disentitle the plaintiff the grant of relief.

A. Kanthamani v. Nasreen Ahmed [16]

“24. The expression “readiness and willingness” has been the subject-matter of interpretation in many cases even prior to its insertion in Section 16(c) of the Specific Relief Act, 1963. While examining the question as to how and in what manner, the plaintiff is required to prove his financial readiness so as to enable him to claim specific performance of the contract/agreement, the Privy Council in a leading case which arose from the Indian courts (Bombay) in Bank of India Ltd. v. Jamsetji A.H. Chinoy[17]  , approved the view taken by Chagla, Actg. C.J., and held inter alia that:

it is not necessary for the plaintiff to produce the money or vouch a concluded scheme for financing the transaction to prove his readiness and willingness.

25. The following observations of the Privy Council are apposite: (Jamsetji case[18] , SCC OnLine PC)

“… Their Lordships agree with this conclusion and the grounds on which it was based. It is true that Plaintiff 1 stated that he was buying for himself, that he had not sufficient ready money to meet the price and that no definite arrangements had been made for finding it at the time of repudiation. But in order to prove himself ready and willing a purchaser has not necessarily to produce the money or to vouch a concluded scheme for financing the transaction. … Their Lordships would only add in this connection that they fully concur with Chagla, Actg. C.J. when he says:

‘In my opinion, on the evidence already on record it was sufficient for the court to come to the conclusion that Plaintiff 1 was ready and willing to perform his part of the contract. It was not necessary for him to work out actual figures and satisfy the court what specific amount a bank would have advanced ……’.”                

(emphasis supplied)

Boramma v. Krishna Gowda[19]

“10.   Ms. Agarwal has read to us the statement of PW 2.  In the cross- examination, PW2 stated that he had not offered at any time to Boramma the amount and that he had not deposited any amount in court.  Explanation to clause (c)  of Section 16 makes it clear that where a contract involves the payment of money, it is not essential for the plaintiff to actually tender to the defendant or to deposit in court any money, except when so directed by the court.                                                          

(emphasis supplied)

Azhar Sultana v. B. Rajamani[20]

“31. We are, however, in agreement with Mr. Lalit that for the aforementioned purpose, it was not necessary that the entire amount of consideration should be kept ready and the plaintiff must file proof in respect thereof. ”                               

(emphasis supplied)

Apart from the aforesaid the following must also be borne in mind while conducting a suit for performance.

5. The plaintiff must seek appropriate relief.

It often happens that a contract is terminated and that fact gives rise to a cause of action to file a suit for performance. In such cases the failure to apply to have the termination set aside would be fatal to performance as without an appropriate relief to set aside the termination it would be deemed the plaintiff has accepted the same and then cannot sue for performance of a contract treated as at an end by his conduct.

In I.S. Sikandar v. K. Subramani[21],the  Supreme Court held that on failure to pray for and seek to declare that a termination was wrongful the further relief to perform the terminated agreement could not be granted:

“37. As could be seen from the prayer sought for in the original suit, the plaintiff has not sought for declaratory relief to declare the termination of agreement of sale as bad in law. In the absence of such prayer by the plaintiff the original suit filed by him before the trial court for grant of decree for specific performance in respect of the suit scheduled property on the basis of agreement of sale and consequential relief of decree for permanent injunction is not maintainable in law.”                     

(emphasis supplied)

The provisions of Section 22[22] must also be considered when seeking relief in cases where the plaintiff is not in possession of the land or property in dispute.

Adcon Electronics (P) Ltd. v. Daulat[23]

16. In a suit for specific performance of contract for sale of immovable property containing a stipulation that on execution of the sale deed the possession of the immovable property will be handed over to the purchaser, it is implied that delivery of possession of the immovable property is part of the decree of specific performance of contract. But in this connection it is necessary to refer to Section 22 of the Specific Relief Act, 1963. ……….

17. It may be seen that sub-section (1) is an enabling provision. A plaintiff in a suit of specific performance may ask for further reliefs mentioned in clauses (a) and (b) thereof. Clause (a) contains reliefs of possession and partition and separate possession of the property, in addition to specific performance. The mandate of sub-section (2) of Section 22 is that no relief under clauses (a) and (b) of sub-section (1) shall be granted by the court unless it has been specifically claimed. Thus it follows that no court can grant the relief of possession of land or other immovable property, subject-matter of the agreement for sale in regard to which specific performance is claimed, unless the possession of the immovable property is specifically prayed for.”

­­6. Who are the necessary parties to a suit for specific performance.

It is not unusual that during the pendency of an action or even before in case a party to the contract creates third party rights then such persons claiming title from one of the contracting parties becomes a necessary party. Who would be appropriate parties to a suit for performance would depend on the facts of a case, Order I Rule 10 of the Civil Procedure Code, 1908 and Section 19[24] of the Act which provides an indication. The Supreme Court in Kasturi case[25] has succinctly laid down the principles to consider i.e. who should be a necessary party in a suit for performance.

Kasturi v. Iyyamperumal [26]

“7.  In our view, a bare reading of this provision, namely, second part of Order 1 Rule 10 sub-rule (2) CPC would clearly show that the necessary parties in a suit for specific performance of a contract for sale are the parties to the contract or if they are dead, their legal representatives as also a person who had purchased the contracted property from the vendor. In equity as well as in law, the contract constitutes rights and also regulates the liabilities of the parties. A purchaser is a necessary party as he would be affected if he had purchased with or without notice of the contract, but a person who claims adversely to the claim of a vendor is, however, not a necessary party. From the above, it is now clear that two tests are to be satisfied for determining the question who is a necessary party. Tests are — (1) there must be a right to some relief against such party in respect of the controversies involved in the proceedings; (2) no effective decree can be passed in the absence of such party.

                               *                                   *                                   *

10. That apart, from a plain reading of Section 19 of the Act we are also of the view that this section is exhaustive on the question as to who are the parties against whom a contract for specific performance may be enforced.

                                  *                                   *                                   *

15…Therefore, in our view, a third party or a stranger to the contract cannot be added so as to convert a suit of one character into a suit of different character.”

        (emphasis supplied)

7. The proper form of decree.

In cases where there is a transfer of the suit property by the contracting party and then the party in default suffers a decree for performance the proper form of a decree is as laid down in Durga Prasad v. Deep Chand[27] where it was held that the defendant and the transferee must join in the performance.

The principle was again applied recently in Vijay A. Mittal v. Kulwant Rai.[28]

38. The question arose before this Court in Durga Prasad v. Deep Chand  as to what form of decree should be passed in the case of specific performance of contract where the suit property is sold by the defendant i.e. the owner of the suit property to another person and later he suffers a decree for specific performance of contract directing him to transfer the suit property to the plaintiff in term of contract.

39. The learned Judge, Vivian Bose, J. examined this issue and speaking for the Bench in his inimitable style of writing, held as under: (Durga Prasad case[30] )

“Where there is a sale of the same property in favour of a prior and subsequent transferee and the subsequent transferee has, under the conveyance outstanding in his favour, paid the purchase-money to the vendor, then in a suit for specific performance brought by the prior transferee, in case he succeeds, the question arises as to the proper form of decree in such a case. The practice of the courts in India has not been uniform and three distinct lines of thought emerge. According to one point of view, the proper form of decree is to declare the subsequent purchase void as against the prior transferee and direct conveyance by the vendor alone. A second considers that both vendor and vendee should join, while a third would limit execution of the conveyance to the subsequent purchaser alone. According to the Supreme Court, the proper form of decree is to direct specific performance of the contract between the vendor and the prior transferee and direct the subsequent transferee to join in the conveyance so as to pass on the title which resides in him to the prior transferee. He does not join in any special covenants made between the prior transferee and his vendor; all he does is to pass on his title to the prior transferee.”

8. Limitation for an action.

The prescribed period of limitation for a suit of specific performance is three years from the date fixed for performance or if no such date is fixed, when the plaintiff has notice that performance is refused[31].

Rathnavathi v. Kavita Ganashamdas[32]

“42. A mere reading of Article 54 of the Limitation Act would show that if the date is fixed for performance of the agreement, then non-compliance with the agreement on the date would give a cause of action to file suit for specific performance within three years from the date so fixed. However, when no such date is fixed, limitation of three years to file a suit for specific performance would begin when the plaintiff has noticed that the defendant has refused the performance of the agreement.

43. The case at hand admittedly does not fall in the first category of Article 54 of the Limitation Act because as observed supra, no date was fixed in the agreement for its performance. The case would thus be governed by the second category viz. when the plaintiff has a notice that performance is refused.

44. As mentioned above, it was the case of the plaintiff that she came to know on 2-1-2000 and 9-1-2000 that the owner of the suit house along with the so-called intending purchaser are trying to dispossess her from the suit house on the strength of their ownership over the suit house. This event was, therefore, rightly taken as starting point of refusal to perform the agreement by Defendant 2, resulting in giving notice to Defendant 2 by the plaintiff on 6-3-2000 and then filing of suit on 31-3-2000.”

9. Court Passing the decree retains control over the decree even after the decree is passed.

This principle enables the Court to provide assistance to the successful Plaintiff even after the decree to effectuate complete satisfaction of the relief claimed and prevent it from being rendered useless.

The Supreme Court has in Hungerford Investment Trust Ltd. v. Haridas Mundhra[33] explained the power of the Court in the following terms:

“22. It is settled by a long course of decisions of the Indian High Courts that the Court which passes a decree for specific performance retains control over the decree even after the decree has been passed. In Mahommadalli Sahib v. Abdul Khadir Saheb[34],it was held that the Court which passes a decree for specific performance has the power to extend the time fixed in the decree for the reason that Court retains control over the decree, that the contract between the parties is not extinguished by the passing of a decree for specific performance and that the contract subsists notwithstanding the passing of the decree. In Pearisundari Dassee v. Hari Charan Mozumdar Chowdhry[35],the Calcutta High Court said that the Court retains control over the proceedings even after a decree for specific performance has been passed, that the decree passed in a suit for specific performance is not a final decree and that the suit must be deemed to be pending even after the decree…….Fry in his book[36]on specific performance stated the law in England as follows:

“It may and not unfrequently does happen that after judgment has been given for the specific performance of a contract, some further relief becomes necessary, in consequence of one or other of the parties making default in the performance of something which ought under the judgment to be performed by him or on his part; as for instance, where a vendor refuses or is unable to execute a proper conveyance of the property or a purchaser to pay the purchase money . . . .

There are two kinds of relief after judgment for specific performance of which either party to the contract may, in a proper case, avail himself —

(i) He may obtain (on motion in the action) an order appointing a definite time and place for the completion of the contract by payment of the un-paid purchase-money and delivery over of the executed conveyance and title deeds, or a period within which the judgment is to be obeyed, and if the other party fails to obey the order, may thereupon at once issue a writ of sequestration against the defaulting party’s estate and effects. . . . . . .

(ii) He may apply to the Court (by motion in the action) for an order rescinding the contract. On an application of this kind, if it appears that the party moved against has positively refused to complete the contract, its immediate rescission may be ordered; otherwise, the order will be for rescission in default of completion within a limited time . . . . . .”

All the aforesaid principles would apply with equal force to a party seeking specific performance in an arbitration.


* Advocate, High Court, Bombay. Assisted by Arjun Prabhu, Mayur Agarwal and Sheetal Parkash. Author can be reached at karlshroff@gmail.com.

[1] Specific Relief Act, 1963    

[2] Section 10 (prior to its amendment). Cases in which specific performance of contract enforceable.—Except as otherwise provided in this Chapter, the specific performance of any contract may, in the discretion of the court, be enforced……

Explanation.—Unless and until the contrary is proved, the court shall presume—

(i) that the breach of a contract to transfer immovable property cannot be adequately relieved by compensation in money; and

(ii) that the breach of a contract to transfer moveable property can be so relieved except in the following cases—

(a) where the property is not an ordinary article of commerce, or is of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market;

(b) where the property is held by the defendant as the agent or trustee of the plaintiff.

[3] As amended by the Specific Relief (Amendment) Act, 2018

[4] As amended by the Specific Relief (Amendment) Act, 2018

[5] Section10. Specific performance in respect of contracts. — The specific performance of a contract shall be enforced by the court subject to the provisions contained in sub-section (2) of Section 11, Section 14 and Section 16

[6] Statement of Objects and Reasons of Amending Act 18 of 2018.—The Specific Relief Act, 1963 was enacted to define and amend the law relating to certain kinds of specific relief. It contains provisions, inter alia, specific performance of contracts, contracts not specifically enforceable, parties who may obtain and against whom specific performance may be obtained, etc. It also confers wide discretionary powers upon the courts to decree specific performance and to refuse injunction, etc. As a result of wide discretionary powers, the courts in majority of cases award damages as a general rule and grant specific performance as an exception.

(2) The tremendous economic development since the enactment of the Act have brought in enormous commercial activities in India including foreign direct investments, public private partnerships, public utilities infrastructure developments, etc.; which have prompted extensive reforms in the related laws to facilitate enforcement of contracts, settlement of disputes in speedy manner. It has been felt that the Act is not in tune with the rapid economic growth happening in our country and the expansion of infrastructure activities that are needed for the overall development of the country.

(3) In view of the above, it is proposed to do away with the wider discretion of courts to grant specific performance and to make specific performance of contract a general rule than exception subject to certain limited grounds.

[7] Section 20. Substituted performance of contract.— (1) Without prejudice to the generality of the provisions contained in the Indian Contract Act, 1872 (9 of 1872), and, except as otherwise agreed upon by the parties, where the contract is broken due to non-performance of promise by any party, the party who suffers by such breach shall have the option of substituted performance through a third party or by his own agency, and, recover the expenses and other costs actually incurred, spent or suffered by him, from the party committing such breach.

(2) No substituted performance of contract under sub-section (1) shall be undertaken unless the party who suffers such breach has given a notice in writing, of not less than thirty days, to the party in breach calling upon him to perform the contract within such time as specified in the notice, and on his refusal or failure to do so, he may get the same performed by a third party or by his own agency:

Provided that the party who suffers such breach shall not be entitled to recover the expenses and costs under sub-section (1) unless he has got the contract performed through a third party or by his own agency.

(3) Where the party suffering breach of contract has got the contract performed through a third party or by his own agency after giving notice under sub-section (1), he shall not be entitled to claim relief of specific performance against the party in breach.

(4) Nothing in this section shall prevent the party who has suffered breach of contract from claiming compensation from the party in breach.

[8] 16. Personal bars to relief – Specific performance of a contract cannot be enforced in favor of a person –

(a) – (b)      *                          *                            *

(c)   who fails to prove that he has performed or has always been ready and willing to perform the essential terms of the contract which are to be performed by him, other than terms the performance of which has been prevented or waived by the defendant.

Explanation. – For the purposes of clause (c) –

(i)  where a contract involves the payment of money, it is not essential for the plaintiff to actually tender to the defendant or to deposit in court any money except when so directed by the Court.

(ii)   the plaintiff must prove performance of, or readiness and willingness to perform, the contract according to its true construction.

[9] 2019 SCC OnLine SC 203  

[10] (2005) 6 SCC 243  

[11] (2005) 7 SCC 534 

[12] (1967) 1 SCR 227  

[13] 1928 SCC OnLine PC 43    

[14] 2018 SCC OnLine SC 1913 

[15] (2011) 1 SCC 429  

[16] (2017) 4 SCC 654  

[17] 1949 SCC OnLine PC 81 

[18]. Bank of India Ltd. v. Jamsetji A.H. Chinoy, 1949 SCC OnLine PC 81

[19] (2000) 9 SCC 214  

[20] (2009) 17 SCC 27  

[21] (2013) 15 SCC 27  at page 38 

[22] Section 22. Power to grant relief for possession, partition, refund of earnest money, etc.— (1) Notwithstanding anything to the contrary contained in the Code of Civil Procedure, 1908, any person suing for the specific performance of a contract for the transfer of immovable property may, in an appropriate case, ask for—

(a) possession, or partition and separate possession, of the property, in addition to such performance; or

(b) any other relief to which he may be entitled, including the refund of any earnest money or deposit paid or   made by him, in case his claim for specific performance is refused.

(2) No relief under clause (a) or clause (b) of sub-section (1) shall be granted by the court unless it has been specifically claimed:

Provided that where the plaintiff has not claimed any such relief in the plaint, the court shall, at any stage of the proceeding, allow him to amend the plaint on such terms as may be just for including a claim for such relief.”

[23] (2001) 7 SCC 698 

[24] Section 19. Except as otherwise provided by this Chapter, specific performance of a contract may be enforced against.—

(a) either party thereto;

(b) any other person claiming under him by a title arising subsequently to the contract, except a transferee for value who has paid his money in good faith and without notice of the original contract;

(c) any person claiming under a title which, though prior to the contract and known to the plaintiff, might have been displaced by the defendant.

[25] Kasturi v. Iyyamperumal, (2005) 6 SCC 733  

[26] Ibid

[27] 1954 SCR 360   

[28] (2019) 3 SCC 520 

[29] 1954 SCR 360  

[30] Ibid

[31] Article 54 of the Limitation Act, 1963 

For specific performance of a contract. Three years The date fixed for the performance, or, if no such date is fixed, when the plaintiff has notice that performance is refused.

[32] (2015) 5 SCC 223 

[33] (1972) 3 SCC 684 

[34] 1927 SCC OnLine Mad 135  

[35] ILR (1888) 15 Cal 211

[36] Fry on Specific Performance, 6th Edn., p. 546